RESEARCH AND ANALYSIS

Multilateralizing services preferences

Pierre SauvÚ and Anirudh Shingal

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One of the striking features of trade diplomacy in recent years has been the seemingly unstoppable march of preferential trade liberalization and rule-making. Such a trend today very much extends to services. Of the 81 preferential trade agreements (PTAs) in force prior to the year 2000, 70 (86.4 per cent) featured provisions dealing exclusively with trade in goods. During the ensuing decade, more than half of the 147 PTAs in force include provisions on services trade. The above trends signal the heightened importance of services trade in general, the growing need felt by countries to place such trade on a firmer institutional and rule-making footing, and the attractiveness of doing so on an expedited basis via preferential negotiating platforms.

There is generally little debate over the fact that services PTAs offer economic welfare gains relative to the status quo ex-ante. One cannot however deny that the gains from multilateral liberalization are likely to be larger as MFN-based competition is unbiased and the first-mover advantages of possibly second-best service providers are thwarted. To the extent that WTO members undertake enhanced liberalizing commitments across a broad array of services sectors and modes of delivery at the end of the Doha Round, PTA-induced preferences will be automatically eroded, even if not fully. However, given lingering uncertainties on the ultimate fate of the DDA and the continued strong push towards PTAs of all types, the best alternative is perhaps to seek practical means of multilateralizing service sector preferences.

This said, preferences in services may be more theoretical than real for a number of reasons, even as the margins of preference implicit in many recent PTAs appear significant when compared to existing GATS commitments or the (still very partial) signals emanating from DDA liberalization offers. This includes, first and foremost, practical concerns over the very enforceability of preferences rooted in what are often non-discriminatory domestic regulatory regimes. For instance, much prudential regulation in financial markets or regulation targeting consumer or environmental protection concerns cannot meaningfully be applied in a preferential/discriminatory manner. In such cases, de jure preferential regulation (and hence access) becomes de facto MFN regulation and access. In regard to rules of origin, the multilateral disciplines of the GATS embedded in Article V.6 help to promote pro-competitive market outcomes by requiring that North-North and North-South PTAs 1 (62 per cent of notified PTAs and, more importantly, among PTA partners whose aggregate share of world services trade is far greater) adopt the most liberal rule of origin — i.e. the substantial business operations test, whereby any third country investor carrying out substantial business activities in the territory of a party to a PTA must be treated like an investor from any PTA party. Under such circumstances, de jure PTA preferences become de facto multilateral commitments, a not insignificant development when one considers that Mode 3 is both the most important form of services trade (accounting for close to two-thirds of services trade) and, most importantly, that against which the greatest share of commitments (> 60 per cent) are typically scheduled in all negotiating settings.

In contemplating the scope that may exist to multilateralize preferential advances, greater use could be made of the disciplines on recognition found in GATS Article VII on Recognition. 2 Article VII.2 of GATS states that “members of a mutual recognition arrangement (MRA) shall provide adequate opportunity for other interested excluded countries to negotiate their accession to such an arrangement or to negotiate comparable arrangements”. Article VII.4(b) further states that “such arrangements should be notified to the Council for Trade in Services well in advance of the start of negotiations to enable interested third parties to join these negotiations before they enter a substantive phase”. Finally, Article VII.5 states that “wherever appropriate, recognition should be based on multilaterally agreed criteria.”

Significantly, however, the above provisions have not enticed WTO Members to extend MRA benefits to third country suppliers to the extent that they have chosen to notify these under the “closed” integration provisions of Article V of the GATS which does not afford non-members an opportunity to accede to such an MRA. One means to multilateralize bilateral or plurilateral MRAs would be to make it mandatory for their members to notify them under Article VII of the GATS. An alternative would be to constrain eligibility for MRAs pursued under Article V solely to PTAs that share contiguous borders or a common geographical space given that geographical proximity is more likely than not to be associated with higher levels of regulatory cooperation, including in matters of recognition and labour market cooperation. Under such rules, MRAs concluded among geographically distant countries (i.e. trans-regional PTAs) would need to be notified under the “open regionalism” provisions of Article VII:2 GATS.

Matto and Sauvé (2010) have suggested another possibility wherein PTA members could be required to pre-commit to future multilateral liberalization by signalling a precise time-frame over which preferential treatment would be progressively eroded and/or eliminated. An alternative to the above prescription would once again proceed along geographical proximity lines, by allowing parties to PTAs among contiguous or geographically proximate (i.e. forming a common geographical space) partners to dismantle preferences at a slightly lower pace. Such differentiated treatment could vary by level of development of PTA partners. It could, for instance, be limited solely to South-South PTAs in a manner analogous to the rule of origin provisions foreseen under Article V:3(b) GATS.

PTA rules of origin affecting Mode 4 suppliers should also be relaxed such that residents of a party (subject potentially to a six-month to one-year prior residency rule so as to avoid abuse) and not solely permanent residents or citizens, can enjoy temporary entry privileges within an integration area.

Finally, preferential services agreements adopting the most liberal denial of benefits provisions can be showcased as “best practice” agreements against which existing accords can be modified and/or future accords negotiated. Alternatively, WTO members could be encouraged to agree to a set of voluntary best practice/pro-multilateralization guidelines directed at those contemplating preferential liberalization and rule-making in services and against which existing accords could be modified and future accords negotiated.

References

Mattoo, Aaditya and Pierre Sauvé (2010), “The Preferential Liberalization of Services Trade”, NCCR Working Paper N.o 2010/13 (May), Bern: World Trade Institute. 

Notes:
1
. However, GATS Article V.3(b) affords parties to South-South PTAs the right to adopt a more restrictive rule of origin and deny the benefits of integration to third country investors that are not owned or controlled by juridical persons of a PTA party. back to text
2. Recognition is the act of recognizing the education or experience of a foreign service provider for the purpose of meeting the domestic country’s authorization, licensing or certification requirements and is especially important in the case of trade in professional services. Such recognition can be accorded autonomously or can be embedded in an arrangement or agreement with the interested country(ies) — the latter takes the form of a Mutual Recognition Agreement (MRA). back to text


Pierre Sauvé is Deputy Managing Director and Director of Studies, World Trade Institute, University of Bern

Anirudh Shingal is Senior Research Fellow, World Trade Institute, University of Bern.

 

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